Bayer vs. Monsanto: Who is the “patsy” at the Poker table ?

One of the highest profile merger cases at the moment is the Bayer / Monsanto case.

A quick recap:

In may 2016, Bayer made a proposal to buy Monsanto. The first offer was 122 USD per share which was rejected. Bayer increased the offer 2 times, first to 125 USD and currently to 127,5 USD.

The big question is: Why is Monsanto only trading at 107 USD (at the time of writing)? Compared for instance to the initial ChemChina/Syngenta deal spread, the Bayer case looks a lot more solid:

+ Bayer has the money to pay and the CEO is dedicated to follow through at almost “any cost”
+ regulatory approval likely although some parts might need to be divested
+ no “China malus” like ChemChina/ Syngenta

The Bloomberg “arbitrage” Function only gives the deal only a 39% chance of closing. They calculate this based on the 20 day average price (pre offer day).

Working backwards from the probability, the “undisturbed” Monsanto price should be around 93,90.

Looking at Bayer and using the same 20 day period, the stock is down ~ 9,50 EUR or 9,2% based on an “undisturbed” price of 103,50 EUR.

Potential issues:

Monsanto is a very liquid large cap and most likely every special situation / merger arbitrage fund is looking at this.

One explanation could be that 2016 has been the year of cancelled mergers, so many M&A arbitrage specialists could be in trouble and maybe fight with redemption.

On the other hand, there is so much money out there that this doesn’t justify a spread so rich in such a liquid stock.

In my opinion 2 main issues could be the reason for the discount:

  1. Bayer CEO:
    The Bayer CEO Werner Baumann is pretty new as CEO. He was appointed in May 2016 and followed on the extremely succesful Dutch CEO Martin Dekkers. Baumann was not a board member before but the deal maker in the second row. The Monsanto deal is very controversial, clearly outside the company as well as inside. Although he is a company veteran, there could be big internal power struggles going on internally, especially from other board members who are maybe disappointed that they didn’t become CEO and maybe have different ideas about the future of the company. Interestingly even the old CEO was against the deal according to “informed sources”. The small increases in the offers made could indicate that he has only a backing up to a certain point, not to an indefinite price.
  2. Monsanto CEO:
    Hugh Grant, the Monsanto CEO actually tried to be the industry consolidator himself when he tried to acquire Syngenta a year ago. Syngenta refused the deal and he had to cut costs and issue a profit warning. I am not an expert but I am pretty sure that the CEO of the “Most evil company on the planet” would prefer to be the leader of such a giant company instead of walking away with 110 mn USD. For me, the guy is the biggest wild card: So far he has played along pretty well but made no commitment yet. It is pretty clear that he doesn’t want to be taken over. The question is: What can he do against it ? Based on what I said above i think the most likely defense is to raise the required price above Baumann’s “threshold”.

 

Just looking at pictures of those two guys make me wonder:

Hugh Grant:

monsantoceo

Werner Baumann:

 

Is Baumann really a match for Grant when it really gets tough ? Will Grant suddenly come out with a Poison Pill ? Who knows, but if you would put those 2 guys into one room, I am not sure if Baumann stands a chance. It is different to negotiate behind the scenes as the M&A guy compared to manage all stakeholders as CEO.

So I am pretty sure that the Monsanto deal is not a “no brainer”, rather the opposite.

Valuation attempt

Let’s look at the valuation nevertheless. If we assume a naive 50/50 chance of the deal closing, we would have the following payouts:

If the deal goes through, I will gain (127,5-107)= 20,50 or +19,1% based on the current price. If the deal fails and Monsanto goes back to the assumed “undisturbed” price of 93,90, I lose (107-93,90) =-13,1 or -12,2%. This would result in an expected return of around 3,5%. Not bad, but also not that great either, considering that IO also have FX risk.

I tried to play around with call options for Bayer (if the bid fails, the price should go up), but using the share prices from teh beginning, the expected return doesn’t get much better.

Only if I assume that the undisturbed price of Bayer would be higher than long Monsanto/long Bayer call strategy looks better. But that again already looks like a call on the Bayer share price which then is further away from an “arbitrage” deal.

“Informed sources” news

Although “informed sources” keep insisting that a deal happens any day, Monsanto’s share price doesn’t move. In situations like this it is not uncommon that those “anonymous sources” spread misleading information.

In the Monsanto/Syngenta case for instance the following piece of “news” appeared on Bloomberg;

Syngenta Gains 8.6% as Monsanto Said to Increase Takeover Bid

  • New bid would value Syngenta at about 470 francs per share
  • Syngenta board said to schedule meeting to decide on response
(Adds analyst comment in fifth paragraph.)By Ed Hammond, Aaron Kirchfeld and Matthew Campbell(Bloomberg) — Syngenta AG rose the most in more than three months in Zurich trading as people familiar with the matter said U.S. rival Monsanto Co. has made an increased takeover offer, seeking to draw the Swiss agro-chemical producer to the negotiating table after its earlier approach was rejected.

Not much later later the following news appeared:

MORE: Monsanto No Longer Pursuing Bid for Syngenta

By Aoyon Ashraf

(Bloomberg) — Monsanto says it is no longer pursuing current bid for Syngenta as proposal didn’t meet expectations.

  • Says without basis for constructive engagement from Syngenta, Monsanto will continue to focus on its growth opportunities built on its existing core business

The stock from Syngenta dropped more than -15% after that as the “merger arb” guys were fleeing the stock.

So one has to be extra carefull with this kind of anonymous news. I suspect that some players use this kind of tactic to get out of the position when they see the deal falling apart.

Summary

Although the potential upside looks attractive, I do think that I am at an informational disadvantage here. I don’t fully understand why the price is so low . There is the famous saying also used by W. Buffett:

“As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

So after looking into the Monsanto/Bayer poker game, I don’t know exactly who is the patsy (or why someone would sell shares at 107 USD), so I have to assume that it is me if I would buy Monsanto shares. So I better watch this from the sidelines. If Monsanto drops really hard into the 80ies (if the deal falls apart), one could think about a “busted M&A” special situation .

UPDATE: After finishing the post but before publishing there was news that Monsanto will hold a board meeting today (Sep. 13th) to decide about the deal. The stock price lost -1%, which for me indicates that they will not accept the offer and will require a (much) higher price.

Update: It seems that Bayer has again increased the offer by 1,50 USD/share. Maybe Baumann wants to force Grant into a “Bore out” syndrom so that he has to retire ? Very strange tactic.

 

 

 

 

 

 

 

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